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Skechers USA Stock Could Be a Big Winner in July

Luke Lango

We just turned the page into a new month, and as such, it seems like an appropriate time to load up on a handful of stocks that could be big winners.

One of my favorite stocks for July 2018 is Skechers USA (NYSE:SKX). The athletic apparel company has seemingly found a niche in the crowded athletic retail world by focusing on price and comfort over coolness and quality. Skechers has been dominating that niche both domestically and globally for several quarters now, and the company is actually among the fastest growers in the whole athletic apparel space.

And yet, SKX stock remains the cheapest stock in that space.

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Peers Nike (NYSE:NKE) and Under Armour (NYSE:UAA) reported slower revenue growth than Skechers last quarter. NKE and UAA stock both trade at over 25-times forward earnings. SKX stock trades at 14.5-times forward earnings.

Also, that 14.5-times multiple is against the backdrop of 16.5% sales growth last quarter and 20% operating profit growth.

That just doesn’t make any sense. SKX stock is materially undervalued relative to peers and relative to its own growth prospects.

The question, though, is when will SKX stock bounce back?

Earnings are due by the end of July, and I’m expecting those numbers to be quite good. Solid quarterly earnings should cause SKX stock to pop.

Here’s a deeper look:

Skechers Is Set to Report Strong Earnings

Skechers is winning in the athletic apparel game by focusing on a part of the market that most other athletic apparel companies are ignoring.

The likes of Nike, Under Armour, Adidas (OTCMKTS: ADDYY), Lululemon Athletica (NASDAQ:LULU), and others are trying to “out-class” one another. They are fighting to create premium products that are always on-trend and have unparalleled appeal.

But Skechers is doing something entirely different. They are emphasizing price and comfort over coolness. In doing so, Skechers is creating some decent looking, ultra comfortable shoes at very reasonable prices.

Who buys those? Not the top-tier athletes, shoe enthusiasts, or trend followers who would do anything to have the latest and greatest footwear. But for the rest of us, a solid pair of Skechers running shoes for $60 sound like a good deal.

And as Skechers is finding out, the “rest of us” is a pretty big market. Domestic growth has been hot. International growth has been hotter. Overall, revenue growth rates have been in excess of 15% for several quarters now, a mark which only Lululemon and Adidas can rival.

Skecher’s July earnings report will affirm a continuation of this trend wherein Skechers grows big — thanks to its focus on delivering good shoes at good prices.

According to Google Trends, the past three months have been more of the same for the Skechers brand internationally and domestically, which is just higher and higher search interest. That means that interest in and awareness of the Skechers brand is growing globally, and that further means that sales could be quite robust this quarter.

That’s big because SKX stock dropped last quarter after the guide disappointed. But if that guide proves to be conservative — and revenue growth is just as robust this quarter as it was last quarter — then SKX stock could take off like a rocket ship.

SKX Stock Is Way Undervalued

On a longer-term basis, SKX stock looks like a great investment opportunity at these levels.

After all, this is a company growing profits by 20% with a stock that is trading at under 15-times forward earnings. That implies not a lot of risk, but a ton of potential reward through super-charged growth.

My numbers on SKX stock imply that this stock has another 50% upside to fair value.

Revenue growth in excess of 15% isn’t here to stay forever. Eventually, the law of large numbers will kick in, and growth rates will come down. But, growth should remain positive — thanks to Skechers’ unique value proposition. Thus, over the next five years, revenue growth should run around 5 to 10% per year.

Margins should to continue to expand alongside robust revenue growth, and that margin expansion should power outsized earnings growth. Modeling out 5-10% revenue growth alongside margin expansion, I think Skechers can do about $4.10 in earnings per share in five years, versus $1.78 last year.

A market-average 16 forward multiple on that implies a four-year forward price target of just under $66. Discounted back by 10% per year, that equates to a present-day value in the mid-$40s, which is 50% higher than today’s price tag.

Bottom Line on SKX Stock

SKX stock has been unfairly beaten up, and is now trading at levels that make no sense — considering the company’s strong growth prospects. Second-quarter earnings, due in the back-half of July, will underscore the company’s strong growth prospects. As a result, SKX stock should head materially higher by the end of the July.

As of this writing, Luke Lango was long SKX.

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